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Keynesian Theory of Employment

Introduction to Keynesian Theory of Employment

John Maynard Keynes

Keynesian Theory was given by Keynes when in his volume “General Theory of Employment, Interest and Money” had not only criticized the Classical Theory of Employment, but had also analyzed those factors that affect the employment and production level of an economy. Most of the modern economists agree with the concept of Keynes. The Keynesian Theory of Employment is a produce of the world-wide depression of 1931-36. Due to this depression, unemployment spread in all independent capitalist economies. Keynes analyzed that situation of unemployment and tried to find the reason and solution to that problem.
During that time, the theories of British economist John Maynard Keynes—of deficit-based, government stimulus spending and strong regulation of markets—dominated economic policy and thought.

Explanation of the Theory of Employment

“Classical theory of Employment”, but had also analyzed those factors that affect the employment and production level of an economy. Most of the modern economists agree with the concept of Keynes. The Keynesian Theory of Employment is a produce of the world-wide depression of 1931-36. Due to this depression, unemployment spread in all independent capitalist economies. Keynes analyzed that situation of unemployment and tried to find the reason and solution to that problem.

According to this theory, since the demand for goods and services is not so much that the total actual resources may be utilized, unemployment arises. In the words of Keynes,

The deficiency in effective demand, stops the increase in employment to reach the full employment level.

On an increase in the effective demand of the consumers, the resources are utilized in large quantities, and the level of employment rises. When people start demanding another product in place of a product temporarily, unemployment would increase due to fall in total demand, it shall be of irregular nature. Actually, a permanent fall in demand occurs, when instead of making expenditure on consumer goods, people try to save most part of their incomes. A deficiency in demand for goods and services in one sector of the society in not compensated by an increase in demand for goods and services in another sector, and total demand declines. Thus, if the desire to save from their particular income is more than the desire for substitution expenditure have become a reverse relationship, demand and employment increases i.e., when the desire to save, among people is lesser than the substitution expenditure in the society, demand and employment increases.

In Keynes view, the level of employment of any country depends on its effective demand. Effective demand depends on total supply of production and the total demand. The total supply of a production depends on total investment and total consumption. The amount of consumption is affected by the tendency for consumption, and the size of national income. As the income of a person increases, his tendency to consume comparatively reduces. On the other hand, it depends on the amount of investment, rate of interest, and mostly on the marginal efficiency of capital. In the money market, the demand for capital shall be more even during the period of high rates of interest, if in view of the investors, capital is more efficient. The marginal efficiency of capital depends on the substitution cost and the anticipated profits.

Reasons of Spreading of Unemployment

According to Keynes, the three main reasons of spreading of unemployment are: